Commentary: CBO's New Long-Term Budget Projections Jeff Lemieux
December 22, 2003
CBO has done Congress and the public a great service by demonstrating that under reasonable spending assumptions, U.S. fiscal policy cannot be sustained at historic tax rates without significant damage to the economy.
In 1969, Elizabeth Kubler-Ross published "On Death and Dying," which described five stages of grief:
1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance
Mourning the loss of the budget surpluses of the late 1990s cannot be compared with peoples' grief over lost loved ones. But the emotional stages are similar.
The Bush Administration and Republicans in Congress are currently in Stage 1, denial. Congressional leaders act as if there is no budget deficit, and continue to spend without apparent restraint. The Administration has argued that deficits don't matter. (Some Democrats in Congress have moved ahead to Stage 2, anger, but their protestations are not very important these days.)
We expect the anger levels to slowly rise across both parties over the next couple years as it becomes clearer that the recent surge of economic growth will not be enough to bring the budget back into long-term balance. Extra growth may help stabilize the budget and prevent deficits from continuing to rise, but only tough choices on spending and taxes will close the gap.
As anger builds, the bargaining (Stage 3) begins. Congress will say: Let's borrow the money we need to support our deficit spending this year, but promise to cut spending in the future. The bargaining phase will bring out gimmicky balanced budget amendments, and dubious proposals for across-the-board spending freezes or slowdowns. Legislators will imply that spending cuts are just around the corner, but they won't be willing to make tough choices themselves, right now.
(Interestingly, California -- the nation's leader in many ways -- has moved ahead to the "bargaining" stage of the budgetary recovery process. It recently decided to borrow more to cover its deficits, while promising future spending restraint. Of course, the bond rating agencies have lowered California to nearly junk bond status as a result. Debtholders are surer about the borrowing than the restraint.)
The fourth stage of budgetary recovery is depression and sadness. In the case of the budget, that means listening to some future national scold like Ross Perot, telling us what we don't want to hear: that the nation will suffer a long-term economic decline unless the budget is brought closer into balance.
Finally, the nation's leaders will move to Stage 5 and accept the need to make tough choices. They raised taxes and cut spending in 1990 and 1993 when the economy seemed dead and deficit spending seemed unsustainable. They will eventually get to that point again, as deficits persist throughout this decade and the added costs of 77 million retiring baby boomers begin to enter the 10-year budgetary horizon.
The CBO report shows that the budget is in trouble even if
1. "excess" health spending slows to only one percent a year above enrollment growth,
2. tax revenues jump back up to their historical average of 18.4 percent of GDP from their current level of about 16.5 percent, and
3. defense spending needs do not continue to grow, but instead stabilize in real terms after the currently planned build-up is complete.
The value of CBO's new report is that it could help the nation get past denial, skip some of the subsequent stages, and nudge lawmakers into the acceptance phase more quickly. Once policymakers accept the problem, we could start acting to reform (rather than just expand) entitlement programs. We could stop raising domestic spending at unnecessary and unsustainable rates. And we could quit promising (and enacting) tax cuts that we can't afford.
One of the report's lessons is that the sooner action is taken to re-balance the budget, the less painful it will have to be.
Other lessons are clearly stated in CBO's executive summary:
"Driven by rising health care costs and an aging population, spending on entitlement programs -- especially Medicare, Medicaid, and Social Security -- will claim a sharply increasing share of the nation’s economic output over the coming decades.
Unless taxation reaches levels that are unprecedented in the United States, current spending policies will probably be financially unsustainable over the next 50 years. An ever-growing burden of federal debt held by the public would have a corrosive and potentially contractionary effect on the economy.
As the U.S. tax system is currently configured, revenues will increase as a share of gross domestic product. Under current law, taxpayers will face higher rates, with detrimental consequences for work, saving, and economic growth.
Fiscal policy could be financially sustainable if the growth of health care costs slowed significantly from historical rates. But even in those circumstances, tax revenues would probably need to be higher than they have been in the past.
If taxation is restricted to the levels that prevailed in the past, the growth of entitlement spending will have to be substantially reduced. Restricting the growth of outlays for defense, education, transportation, and other discretionary programs would not be enough to ensure fiscal sustainability.
Likewise, economic growth alone is unlikely to bring the nation’s long-term fiscal position into balance. Moreover, issuing ever-larger amounts of debt or dramatically raising tax rates could significantly reduce growth."
Links:
Congressional Budget Office The Long-Term Budget Outlook (December 2003)
Centrists.Org No-BS Long-Term Budget Baseline Homepage
